THE congressional bicameral conference committee has already settled all disagreements on the Senate and House of Representatives versions of the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE), which seeks to erase the unpredictability in the country’s corporate tax and fiscal incentives system.
House Committee on Ways and Means Chairman Joey Sarte Salceda said the bicameral report on CREATE is now awaiting signatures of the members after the bicameral panel successfully reconciled the two versions of the measure late Saturday.
“I have no doubt that CREATE will bring changes. The influx of deferred investment due to 3 years of uncertainty over incentives will be a deluge. I have been talking with several groups of investors, and they’re ready with the money. They just need the rules,” said Salceda.
According to Salceda, $18 billion in foreign direct investments (FDI) were lost over the past three years of uncertainty over the delays in passing the reform.
“Now that it’s done, I expect the investment overhang to close. Investors can now stand on more solid footing,” Salceda said.
The CREATE is part of Package 2 of the Comprehensive Tax Reform Package of the Duterte administration.
The measure will lower corporate income tax from 30 percent, the highest in Asean, to 25 percent for large corporations, and 20 percent for small and medium corporations.
Salceda said Congress is eyeing to ratify the bicameral report on Monday or Tuesday.
“It’s finished. Both panels are now ready to sign. As far as investment uncertainty over tax regime is concerned, that’s finished. We will sign this weekend, and ratify by Monday or Tuesday,” Salceda added.
Salceda said that on the part of the House, the major items the Senate concurred with are: shorter incentives for domestic enterprises, stringent controls against illicit trade in certain ecozones, and longer incentives for all areas outside of National Capital Region.
“Once the revenue estimates are out, I believe we will have saved likely P100 [billion] to 120 billion in foregone revenues compared to the initial Senate version,” the House tax panel said.
Salceda said that he is “particularly proud of the incentives for countryside enterprises, and tax savings from incentives for domestic enterprises.”
Moreover, Salceda, one key concession his panel obtained from the Senate is a shorter—by five years—availment by domestic enterprises of the special corporate income tax (SCIT) or enhanced deductions, compared to the Senate version. Additionally, they have to have an investment capital of at least P500 million to qualify for the SCIT.
As for critical domestic industries, they will be able to avail of incentives similar to those of export enterprises. The industries qualified as “critical” will be determined by the National Economic and Development Authority (Neda), as “arbiter between fiscal health and industrial development,” as Salceda said.
Duty-free vaccine
Salceda, meanwhile, said the final version will carry both a VAT exemption and a duty exemption for Covid-19 vaccines until 2025.
The bill provides VAT-free importation and sale of Covid-19 medicines, PPEs and PPE components up to December 2023.
This, Salceda said, will help expedite Covid-19 procurement, especially by the private sector.
“Vaccine rollout is the most important economic stimulus measure. We are happy to report that CREATE/Citira will also help get it done,” Salceda said.
The bill provides VAT exemption for medicines for cancer, mental illness, tuberculosis, HIV-AIDS, and kidney diseases beginning January 1, 2021.
The incentives
The bill provides up to 17 years of incentives for exporters and for “critical” domestic enterprises, with 4 to 7 years of income tax holiday (ITH) and 10 years of special corporate income tax (SCIT). “Critical” industries will be defined by the Neda.
The bill also provides incentives for domestic enterprises up to 12 years of incentives, with 4 to 7 years of ITH and 5 years of SCIT for enterprises with investment capital not less than P500 million, and 5 years of enhanced deductions otherwise.
The measure also grants performance-based enhanced deductions to encourage job creation, value added, research and development, training, and the use of local materials with several performance-based enhanced deductions. These include depreciation allowance for assets acquired for the production of goods and services, deduction on labor expense, deduction on research and development, deduction on training expense, additional deduction on domestic input expense, additional deduction on power expense, reinvestment allowance for manufacturing.
The bill also enhanced the net operating loss carryover (Nolco). It said the net operating loss not yet offset from gross income for the first three years of operations can be carried over as deduction from gross income within the next five years following the loss.
Also, CREATE lowers the minimum corporate income tax, typically charged against manufacturing corporations, from 2 percent to 1 percent from July 1, 2021 to June 30, 2023.
The bill provides lower taxes on nonprofit hospitals and educational institutions. Proprietary educational institutions and hospitals which are nonprofit will pay a corporate income tax rate of 1 percent instead of the current 10 percent, from July 1, 2021 to June 30, 2023.
It lowers taxes for small businesses exempt from VAT. Small businesses (sales under P3 million) will pay 1 percent of gross sales instead of 3 percent, from July 1, 2021 to June 30, 2023.
The bill grants more incentives for relocation outside of NCR. Registered enterprises that fully relocate outside of NCR will be entitled to an additional 3 years of ITH.
More incentives are given for locating in disaster/conflict area. Registered enterprises that locate in areas recovering from disasters or conflict will be entitled to an additional 2 years of ITH.
The CREATE also requires the Department of Finance to review revenue regulations (RRs) for the withholding of creditable tax and direct BIR to amend RRs if adverse to taxpayers.
It mandates the BIR to review processes for creditable withholding tax every three years to improve such processes if they materially impact the taxpayer.
The bill, however, exempts crude oil intended for refining from duties and excise, and taxes the product upon removal once refined, to avoid stranded VAT credits, consistent with international practice.
The CREATE includes the Home Development Mutual Fund (HDMF) in the Tax Code’s exemptions for government corporations. This will protect the dividends of Pag-IBIG fund account holders.
It also provides higher VAT exemption threshold for sale of real property. The VAT exemption threshold for socialized and low-cost housing was raised to P2.5 million; and the VAT exemption for house and lot was raised to P4.2 million.
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